(required return) what required return is implied by the constant growth model for a stock that...
(required return) what required return is implied by the constant growth model for a stock that is selling for $25.00 per share and is expected to pay a single cash dividend next year of $1.80, and whose growth in dividend payments is expected to be 2% per year forever?
Homework Answers
What required return is implied by the constant growth model for a stock?
Answer: 11%
Formula for calculating required rate of return on equity (Ke) based on the dividend growth model is as follows
Data provided in the Question are
D1 = Dividend in year 1 = $1.80
P0 = Price in year 0 = $25
g = Growth rate = 2% (i.e. 0.02)
Ke = ($1.80 ÷ $ 20) + 0.02
=0.11
=11%
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